Consultants and Professional Liability: A Legal Case Study

by Dave Sukert

Plaintiff: An auto parts distributor.

Defendant: A management consultant.

Case study: The consultant is hired to help with staffing, budgeting and executive decision making. The consultant implements a reorganization strategy that redefines management roles, initiates spending controls and uses a new staffing model.

Allegations: Eighteen months after the reorganization the client alleges the spending controls and new staffing model have resulted in a negative impact to its bottom line. The client files suit accusing the consultant of negligence in rendering a flawed solution and seeks compensation for its alleged lost profits.

Result: Case settled.

Cost: $150,000 settlement, plus an additional $75,000 in legal expenses.

If there is a silver lining to the case, it’s that the management consultant had protected himself with a professional liability insurance policy. The settlement and the cost for his legal defense were paid by his insurer.

Without the right coverage, he could have ended up with a lien against his property or in severe debt. Owing to provisions within the policy, even his lost wages for time spent during the deposition and trial were paid by his insurance.

Ultimately his only cost was a certain degree of aggravation and embarrassment. Although it’s nice to have insurance to foot the bill, a claim can still damage your professional reputation.

What could have been done differently? How could he have avoided the situation in the first place? Here are a few steps management consultants can take to mitigate claims:

• Have a written contract and/or an engagement letter detailing what services will be provided, what is included and the fees for providing those services.

• Define time frames and milestones to demonstrate progress and clarify deliverables.

• Outline what responsibilities are yours and what the client must provide in order for you to get the job done.

• Communicate throughout the entire job, give the client realistic expectations up front and provide regular status updates.

• Implement quality control procedures and regularly conduct audits to ensure the procedures are being adequately executed.

While contracts, engagement letters and risk management procedures can help reduce the chances of a professional negligence claim, there’s no guarantee a mistake will not occur or that a client won’t be dissatisfied.

Professional liability insurance gives you an extra layer of protection against the unexpected and can strengthen your legal defense against allegations of negligence. Defending a claim is costly and time consuming. Regardless of whether a suit is reasonable, you will still need an attorney and as demonstrated from the case cited, attorneys’ fees can mount up quickly.

If you are operating ‘bare’, the best advice we can give you is to implement your own risk management controls and talk to your insurance broker about a professional liability policy. Considering the high cost of litigation versus the reasonable cost of insurance, it just makes sense.